Housing affordability has improved since 1990 mainly due to a substantial fall in home loan interest rates.
Access toaffordable housing is a key issue for households and forms an important part of government housing policy. Affordability is a measure of the ongoing costs of housing in relation to income and, consequently, impacts most on people with low incomes and at particular stages in their lives. Affordability and accessibility of housing are determined by factors including the price of housing, the financial resources of prospective purchasers, conditions pertaining to the granting of mortgages (e.g. the housing interest rate and the amount borrowed) and the relationship between these factors.
Measures of housing accessibility and affordability reflect both the household's savings capacity and repayment capacity. Accessibility to housing is mainly related to the deposit gap (the difference between the home purchase price and the amount able to be borrowed) while affordability of housing is related to a household's repayment capacity, which is based on income.
Housing affordability decreased substantially between 1988 and late 1989 when interest rates were high. Housing interest rates peaked at 17% in mid-1989, considerably reducing access to home purchase. Reductions in interest rates since 1990 have been a major contributing factor to improving housing affordability.
The national picture given by the affordability index, however, masks differences in the index across capital cities. For the financial year ending June 1993, the index showed accessibility of housing greatest in Hobart and Perth and least in Sydney. Comparing it to the moving annual median prices of established houses in June 1993, housing affordability varied between capital cities according to house prices, since interest rates remained comparable between States and Territories. Sydney had the highest house prices and the lowest affordability index. In contrast Hobart house prices were the lowest of all capital cities and, accordingly, the housing affordability index was the highest.

(a) The housing interest rate is the interest rate applicable on the last working day of the month to standard variable rate loans for owner occupation of large bank housing lenders. It is either the predominant rate or a representative rate (or range of rates) of major banks, although some banks may quote rates outside the range.
Source: Reserve Bank of Australia Bulletin

Housing affordability index
The housing affordability index, derived by the Housing Industry Association and the Commonwealth Bank, measures the ability of households to meet the cost of buying their first home. The index is the ratio of average household income to the income necessary to meet repayments on an average established dwelling purchased by a first home buyer. Income measures are based on national accounts estimates of household disposable income.
An increase in the index, represents an improvement in affordability, and a decline in the index a decrease in affordability. A value less than 100 indicates that a household with average annual income would have less than the income required to service an average mortgage.

Meeting housing needs
Factors influencing whether a household is likely to be purchasing or renting are discussed in Housing the population. For a given occupancy status, the proportion of income spent on housing can be used as a broad measure of the ease (or difficulty) that people experience in meeting their housing commitments. However, to the extent that higher housing payments may reflect discretionary savings among home purchasers, care should be exercised in the use of such a measure. In the rental sector, households may choose to pay a higher rent to live close to employment and so reduce travel time and cost. Nevertheless, a comparison of the proportion of income spent on housing for different types of households and levels of income provides insight into those groups most likely to be under financial pressure through housing costs.
Between 1982 and 1990, the proportion of income spent on housing increased for both private renters and home purchasers, with home purchasers experiencing the greatest increase. As expected, low income households spent proportionally more of their income on housing than high income households.
As well as the cost of housing, affordability is influenced by the level of available income. This may change as the employment status of family members changes, for example, changing from full-time to part-time work or becoming unemployed. It may also change with changes in family composition. Such changes can reduce affordability even though housing costs remain unchanged.

Low and high income unit income
The income measure used in calculating the proportion of income spent on housing is the gross income of income units. Income units are defined as groups of related people who live together and form a single spending unit. As such they can be considered analogous to families in that they may comprise a couple (with or without dependent children), a lone parent (with dependent children), or a lone person (including non-dependant children and other adults living in the same household).
The size and composition of income (family) units influences the standard of living achievable for a given level of income. Furthermore, family members who are working incur greater costs for transport and clothing than non-working members. The gross income measures used here have not been adjusted for this compositional effect and this should be borne in mind when comparing different types of income units.
In order to assess the relationship between housing costs and income levels across the income distribution, income units have been divided into income quintiles and the second and fourth quintiles chosen to represent low and high income levels respectively.

Home purchasers
At low income levels, home purchasing couples with dependants spent a higher proportion of their income on home purchase than other income unit types. Between 1982 and 1990 the proportion of their income spent on home purchase increased from 35% to 50%, a consequence of the higher interest rates in the late 1980s. The reduction in interest rates after their peak in 1990 is likely to have eased this situation in subsequent years. Couples without dependants spent a lower proportion of their income on home purchase than other income unit types.
At high income levels, average spending on home purchase was much the same at about a quarter of income regardless of income unit type.
Another factor influencing affordability for home purchasers is the length of time for which they have been paying their home loan. Older loans are generally easier to service in that the repayments the lender requires usually remain static over the term of the loan while a person's income usually increases with age. Hence, the proportion of income spent on housing generally decreases for older people who have older mortgages. However, flexible home loan arrangements promoted by financial institutions in recent years have affected, and will continue to affect, this pattern.

Private renters
Private renters spent a higher proportion of their income on housing in 1982 compared to home purchasers. However, they experienced a smaller rise than home purchasers in the proportion of income spent on housing between 1982 and 1990.
At both high and low income levels lone persons spent a lower proportion of their income on private rent than other income unit types.
Private renters with low incomes spent just over a quarter of their income on housing in 1982, and this had increased to one-third by 1990. Those with high incomes spent 14% of their income on housing in 1982 and experienced a smaller increase, to 18%, in 1990. In contrast to purchasers, the proportion of income spent on housing by renters generally increased with age. This is a function of rents keeping pace with inflation and incomes compared to loan repayments decreasing in real terms over time.